EU Banks’ Debt Addiction Threatens ECB-Led Overhaul - Bloomberg

EU Banks’ Debt Addiction Threatens ECB-Led Overhaul - Bloomberg:



"When Europe’s leaders set out in June 2012 to break the “vicious circle” between banks and sovereigns, they left rules for treating government bonds untouched, an oversight that may subvert their drive to prevent a recurrence of the debt crisis.



Under EU rules, banks can rate all debt issued by the bloc’s 28 national governments as risk-free, avoiding any increase in their capital requirements. This encourages so-called carry trades, whereby lenders borrow at low cost from the European Central Bank and plow the money into state debt that offers higher returns.



Twenty months after leaders pledged to change this behavior, banks hold more sovereign paper than ever. ECB President Mario Draghi said in December that when the Frankfurt-based central bank offered about 500 billion euros ($680 billion) of new low-cost liquidity two years ago, lenders used it “mostly to buy government bonds,” rather than for lending to stimulate the economy."



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